June 22, 2008

Air Fares to Rise Again If States Don’t Cut Tax

by ssavage

NEW DELHI: Whether air fares - which have been hiked twice in a fortnight - will rise again in a few days could well be decided on Monday, if states refuse to reduce sales tax on jet fuel in a meeting with the civil Aviation Ministry.

With global crude showing no signs of cooling down, oil PSUs are expected to increase the prices of aviation turbine fuel (ATF) again by month-end, creating more financial pressure on airlines.

Arun Mishra, Aviation Ministry's joint secretary, will make a case for lowering of sales tax on ATF before the empowered committee of state finance ministers in Srinagar on Monday.

The panel had earlier asked the Civil Aviation Ministry to explain how ATF prices are fixed and how increasing costs are hitting the airline industry.

The past four hikes in ATF prices has now made fuel accounting for over half of airlines' operating cost and threatening their existence. Airlines have been demanding that tax slab on aviation fuel be reduced to the lowest figure of 4%.

Oil PSUs declare ATF prices on the last day of each month and going by the current prices of crude, a hike seems imminent this time too. According to airlines, they have to go for another price hike if ATF prices get dearer on June 30. However, they can afford not doing so only if sales tax is reduced to 4%.

"These are extraordinarily difficult times for the sector. Only a tax cut can provide some relief to both airlines and passengers as in current situation fares can only rise. We are looking at other steps like seeking relaxation of rules for airlines to fly abroad. But even the airlines currently flying abroad are losing money. So only solution is ATF prices either falling or not rising further," aviation minister Praful Patel said.

SpiceJet executive chairman Siddantha Sharma said that after the latest hike, his airline is closer to recovering costs. "At this level, we are closer to our break-even point. But if ATF prices rise again, the industry will have to hike fares again," he said.

Sharma also countered states argument of not reducing tax on ATF so far - that airlines don't pass on this benefit to passengers by reducing fuel surcharge. "In the past three years, fares on routes like Delhi-Bangalore have fallen from Rs 12,000 to over Rs 6,300 today despite the fact that ATF prices have nearly trebled now. Increased connectivity at lower fares benefits passengers and this can continue only if the cost environment gets less hostile," he said.

Thanks to crude oil prices creating new records in past four months and higher tax amount, ATF prices are so high now that airlines have started cutting flights and hiking fares. This month has already seen them raise both fuel surcharge and basic fares.

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